BIGC - BigCommerce Is Losing Market Share And Headed Nowhere

2023-11-14 12:32:21 ET

Summary

• BigCommerce's revenue growth has decelerated every quarter since the start of 2022, indicating decaying growth trends.
• The company is losing market share to larger competitor Shopify.
• BigCommerce has a heavy debt load, making it difficult for the company to overcome in a high interest-rate environment.
• Though cheap, BigCommerce's risks render the company a value trap.

Though the markets have cause to be optimistic again with the hope that the Fed is done raising short-term interest rates, investors have still punished former growth stocks that have seen a sharp deceleration in top-line trends. BigCommerce (BIGC) is one such name: revenue exploded during the pandemic as e-commerce took off, but it didn't take long for the company to slow down to single-digit growth rates.

Year to date, BigCommerce stock is about flat - but it's down 10% over the past year and down more than 90% versus pandemic-era highs that briefly crossed the $100 mark in late 2020.

BigCommerce's red flags are growing

I last wrote a bearish opinion on BigCommerce in August when the stock was trading above $10. Since then, the stock has come down by nearly 20%, alongside a poor Q3 earnings release that showed a deceleration of growth to the single digits (for the first time) and a meaningful loss of market share to larger competitors like Shopify. Management also announced a broad layoff plan that eliminated 7% of its workforce.

In spite of the company's efforts to curtail losses and preserve the bottom line, I remain bearish on BigCommerce. The key red flags to watch out for, in my view, are the following:

• Decaying growth trends- BigCommerce has seen revenue growth decelerate every quarter since the start of 2022. Sure, we can point to poor macro trends here: but it can also be argued that BigCommerce's non-transactional revenue and subscription ARR should have held up stronger.
• Compares poorly versus Shopify- The big name in e-commerce platforms is Shopify, which is still managing to grow revenue north of 20% y/y despite being at a much larger scale than BigCommerce. This indicates a severe loss of market share, and given that e-commerce brands will want to align themselves to the best platforms that will facilitate online sales growth, this will cause a vicious cycle that will crush BigCommerce.
• Debt load- BigCommerce has more debt than cash, which is rare for smaller software companies. Even though BigCommerce is making progress toward adjusted EBITDA breakeven, this debt load will be difficult for BigCommerce to overcome in a high interest-rate environment.

Valuation update: cheap, but not worth it

The only possible draw toward investing in BigCommerce is its price. At current share prices near $8.50, BigCommerce trades at a market cap of $646.8 million. After netting off the $265.4 million of cash and $339.8 million of debt on BigCommerce's latest balance sheet, the company's resulting enterprise value is $721.2 million. (It's worth noting at this juncture as well that while BigCommerce is roughly flat for the year, rival Shopify has soared more than 70% as of the time of writing).

Meanwhile, for next year FY24, Wall Street analysts are expecting BigCommerce to turn positive profit for the first time with $0.19 in pro forma EPS, alongside $337.1 million of revenue (+10% y/y). Considering growth has already decelerated to the single digits, it may be difficult for BigCommerce to pick back up to a double-digit growth rate especially amid a soft macro outlook for consumer spending (with 5%+ interest rates, many more consumers are waking up to the value of saving).

Nevertheless, taking consensus estimates at face value, BigCommerce trades at:

• 45x FY24 P/E
• 2.1x EV/FY24 revenue

Though BigCommerce's revenue multiple is quite modest, it appropriately reflects a company losing market share and seeing decaying revenue trends. The bottom line: steer clear here, as I continue to view BigCommerce as a value trap.

Q3 download

That brings us now to BigCommerce's Q3 earnings print, which soured investors even further on the name. Take a look at the Q3 earnings summary below:

BigCommerce's revenue grew only 8% y/y to $78.0 million, missing Wall Street's expectations of $78.1 million by a hair. Growth also decelerated to the single digits for the first time, and three points relative to 11% y/y growth in Q2.

To compare this directly to BigCommerce's largest rival: Shopify's revenue grew 25% y/y in the same September quarter, despite the fact that Shopify is more than 20x BigCommerce's scale.

To be losing market share to a much larger competitor is a terrible position for a small/mid-cap software company to be in, hence pessimism over the stock.

Weaker enterprise trends are among the biggest culprits of lower growth for BigCommerce. As shown below, enterprise ARR decelerated to 11% y/y in Q3, adding only $5 million in net-new ARR within the quarter (versus $7 million in Q2).

Speaking to weaker enterprise performance on the Q3 earnings call, CEO Brent Bellm noted as follows:

Enterprise ARR growth fell a little short of our expectations. We continue to see longer sales cycle times and a tougher sales climate across software, while certain significant new customers elected to move launches post holiday into Q1 2024 [...]

As we discussed on our Q2 call, we have experienced an uptick in existing customers seeking to reduce committed order volumes in exchange for lower pricing. In many cases, we have pursued the same approach ourselves at BigCommerce by renegotiating and reducing our software vendor opex costs. In most downgrades, we are successfully retaining customers while negotiating more favorable prepayment and price per order terms.

Some smaller customers have chosen to delay or cancel projects as a result of macro conditions. Customers are spending more time vetting and evaluating platform investments, and these factors have contributed to enterprise ARR not ramping as quickly as we'd hoped during 2023. I have confidence that this business can return to 20%-plus revenue growth and reach a healthy and balanced profitable growth profile as we drive better go-to-market execution and ecommerce settles into a new long term growth trend line."

The company has hired a new President, Steven Chung, to lead go-to-market resurrection efforts. The company's strategy going forward will be to focus more on existing client retention and satisfaction, versus winning new accounts. In my view, this is already a losing battle as larger, more prominent competitors are gaining share.

Profitability is the only saving grace for BigCommerce. The company achieved its best-ever adjusted EBITDA margin of -2% in the quarter, which it described as coming within a "photo finish" of profitability.

This was 14 points better than the year-ago quarter, driven by broad-based reductions in spending - particularly in G&A expense, where BigCommerce's layoffs were focused.

Yet the company can't save its way to profitability - losing top-line leverage here will blunt the benefits of cost savings.

Key takeaways

In my view, there is little incentive to invest in BigCommerce. The company's slide to a single-digit growth rate while rival Shopify continues growing at over 20% y/y, plus a heavy debt load, are the major risks embedded into the stock's seemingly cheap price. Steer clear here and invest elsewhere.

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